{{r.fundCode}} {{r.fundName}} {{r.series}} {{r.assetClass}}

You are currently viewing the Canadian website. You can change your location here.

Terms and conditions for Canada

Welcome to the new RBC iShares digital experience.

Find all things ETFs here: investment strategies, products, insights and more.

.hero-subtitle{ width: 80%; } .hero-energy-lines { } @media (max-width: 575.98px) { .hero-energy-lines { background-size: 300% auto; } }

About this podcast

This episode, Chief Economist Eric Lascelles shares his insight on a variety of economic headlines, including the latest in labour markets as January’s jobs reports come out of Canada and the U.S. Eric also looks at how central banks around the world are heading into a cycle of monetary tightening, and what it means for both economic growth forecasts and financial markets. [21 minutes, 44 seconds] (Recorded February 4, 2022)

Transcript

Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by Canada's hardest working economist, Eric Lascelles, chief economist at RBC Global Asset Management. Eric, welcome.

Thank you very much. Hi.

Again, it's an audio podcast— thank goodness for us—, but they can't see that the hardest working economist in Canada looks like he's been shoveling snow or chopping wood or something this morning. You've been working hard this morning on non-economics?

I was shoveling snow. That's not why I'm wearing a plaid shirt, but nevertheless, yes, we get a lot of snow in Toronto these days.

Well, you can wear a plaid shirt to dig into some big economic numbers like we’ve got this morning; jobs reports in Canada and the U.S. What's there? Surprising numbers on both ends a little bit?

Yes, I think that's fair. I don't know what the forestry numbers were, though, referring to the plaid shirt, but in terms of the numbers, well, 200,000 jobs lost in Canada in January. That's a big drop. Now, let the record show that was the Omicron month, wasn't it? We knew there was going to be some serious economic weakness coming along. We also know it's a temporary phenomenon. I think there was some disappointment the loss was that great, but nevertheless, some losses had been expected. The narrative does fit together. For instance, when you dig into the sectors, it was all service sector job losses. Those are those high touch service sector jobs that are so affected by lockdowns. In fact, accommodation and food services lost 113,000 jobs by itself. So essentially, restaurants got closed in a number of places. And there you have it in the numbers; information, culture, recreation was down 48,000; retail, down 26,000. In a nutshell, that was the loss. It squares quite precisely with what was not permitted temporarily in the month of January. Conversely, the good sector actually generated 23,000 jobs. So that aspect of the recovery continued. I think there's reason to expect, as rules have become much less strict in late January and into early February that we should be getting most, if not all of these jobs back over the next month or two, at the least. I guess a couple of other things to look at. Technically, the loss was even a little bigger than it looked like. So, we lost 200,000 jobs. It's 1% of employment. It's never good when 1% of workers lose their jobs in a single month. I will admit. The number of hours worked was actually down by 2%. Twice as much. Again, some people not being able to go to work for different reasons, and lockdowns being a big part, but also being sick. We've talked before, I think, about how labour supply has been affected by Omicron, just the sheer number of people getting sick. In fact, Stats Canada reported that one in ten workers were absent from work at some point due to illness or disability over the span of January. Just so you know, the normal might be 6% or 7%, but still a third more people weren't able to work even when the jobs existed for them. All sorts of sort of messy things going on in the numbers. Unfortunately, unsurprisingly, Canada's unemployment rate went up as a result of all of that. We went from a happy 5.9%— which I would have described as being pretty much at potential, about as good as it gets sustainably— unfortunately retreating to 6.5%. We should get that back fairly soon. But it was certainly a week month; that's the takeaway for Canada. U.S., you'd think would be similar. It might have rhymed a tiny bit, but really, more differences than similarities. For instance, not only did the U.S. generated jobs, but they generated 467,000 jobs, which is a pretty big number. In fact, I believe it was ahead of every economist forecast for the month. It tells you how big the number is when not a single person got it right. It also tells you sometimes there's statistical remnants in there too, when that happens. We do have certain hints as to what the number should be. Apparently those hints were not sending us in this direction this month. The Omicron damage was not as big for the U.S. That's the takeaway. That makes sense. The U.S. really didn't lock down. Everybody got to keep going to restaurants for the most part and the like. That makes sense that it's a milder hit, in fact, an all but invisible hit that is itself a bit surprising; but still less damage. Made sense. Amazingly, retail sales, retail services, employment up, accommodation services up, food services up. They didn't see a big hit there. They also had some big upward revisions for the prior few months. The month of January, actually, is when they generally do the one-year review. Sometimes they make big discoveries. Usually they're tweaking the numbers for the prior month or two, but in January you sometimes get some pretty massive ones. They're saying they found an extra 709,000 jobs made just in the last two months compared to what they'd previously thought. So that's always nice when you find those under the couch cushions. That's a happy thing. Interestingly, because of all that upward revisions, we can still say this job creation was slower than the last couple of months. At the margin, I guess it's a bit weaker than it might have been. But still, it's a good report. The unemployment rate, for technical reasons, went from 3.9% to 4%, but still, it's a good report. I think we're seeing considerable wage pressures, to no one's surprise. The hourly earnings year over year is up from 4.9% to 5.7%. A lot of strength. Now the debate for market, is this a good thing or a bad thing? Of course, we generally like strong economic activity and it speaks to consumer spending potential and things like that. But equally, of course, here we are also focused on central banks and raising rates. When you get a strong number like this and it seems like the U.S. just brushed off Omicron, which is a hawkish implication for central banks. And so, markets are feeling at best mixed, I would say, about this result just because of what it might mean for central banks.

Do you think it does a lot to change the view of the Fed or is it just another data marker? It's going to take the next month, which is going to come before the next Fed meeting, where they're likely to raise rates, before we know how much this changes anything with respect to where they're taking things?

Yes, I tend to take a pretty methodical approach and just say, well, one important data point that's strong is incrementally more hawkish, but I don't think it's the straw that breaks any kind of camel's back here and forces them to do something that they wouldn't. The market was already thinking there was probably a U.S. rate hike coming in mid-March, and I think that's probably still fair. I guess tongues are wagging a little more, about could they raise by fifty-basis points to begin? I guess, never say never, but it's quite unusual for central banks to raise by that much. I personally think it would not be a desirable message to send as the starting gun of a tightening cycle. And really, if they felt that way, they should have been going in January. I'd be quite surprised if they did anything other than a twenty-five basis point rate hike. As it stands right now, Omicron did less damage, but again, the suspicion was always Omicron was going to be four or six weeks of pain followed by a month or two of rapid recovery. Less pain probably means less rapid recovery. Economy is probably not going to be in all that different place in mid-March than it would have been even without Omicron.

Does it change your forecast for the year in terms of economic growth in Canada or the U.S., or again, is it just another data point that's mixed in with everything else you were seeing and brings you to the same spot that you were before?

Not that different in the end. We were just playing with some of the GDP numbers. We have our big quarterly internal summit next week, and so it's always nice to have fresh numbers for that. And before this number, I was initially thinking maybe I need to revise down my Q1 figure for the U.S. a little bit. Not so much because I was seeing bad things, but because the Q4 number came out so strong and a lot of it was inventory accumulation, and there's normally an offsetting effect the next quarter. You have a big build, there's less of a build and you take it away. I must say, with the employment numbers that just came in, it no longer makes sense to take anything off that first quarter. We actually end up pretty similar to where we started. I guess that's the takeaway there. Clearly, Canada has suffered in the first quarter. We are already budgeting, though, for a decline in Canadian Q1 GDP. I think we're mostly okay. I think this is not out of the realm of expectations as much as the U.S. was a little strong and Canada was a little weak. I suppose the bank of Canada maybe feels good about itself not having raised rates in January, to some surprise. And I still think it would have made sense, to be honest, to raise in January. But still, at least they could say there was a weak job number in there somewhere that maybe held them back. But it's still the case. You look at the most recent business outlook survey for Canada that's run by the bank of Canada, looks at a year, surveys businesses, and they have the most enthusiastic hiring plans over the next year they've had in the history of the series. They also have the most enthusiastic Capex plans. And so, some things can get in the way of that, and rate hikes are one of those things, of course. But nevertheless, I don't see anything to think that the labour market is going to be weak for any sustained period of time in Canada.

We talked a lot in your previous visits about the Fed and bank of Canada. Obviously, we're here in Canada; what the bank of Canada is doing is the most important, and certainly the Fed is dictating a lot of the direction of what the bank of Canada is going to do. But let's look abroad a little bit because it's a big world and there are other central banks who are also making decisions around what to do in their economies. And we saw reports this week, or updates from bank of England and European Central Bank. What do we see going on there? What's different? What's the same? Where do you see them going for the remainder of the year?

Certainly in the same general direction is the main answer. Developed world central banks are now in the business of tightening and 2022 seems likely to be that year for most of the major players. I should say China is doing something very different altogether. They're cutting rates. It's its own story. We'll set that aside. But in some cases, it's just that the economic situation is different. For instance, in Europe, to begin with, there's a longer history of deflationary forces. They frankly don't mind a little tip of inflation just to get rid of that damaging assumption that predated. People were expecting too little inflation. So, their thinking is a little bit different there. It's fair to say Europe has also been more aggressive when it comes to containing Covid outbreaks and things. They've suffered a bit more economic damage, their speed limits lower, and so just a neutral policy rate would be less. There's a reason they went into this with a lower policy rate than anybody else. Europe is a little bit different. And up until quite recently, they were saying they didn't think they'd be raising rates at all in 2022, and now it seems they're signaling they likely will. It's not so much they've said that, but they've no longer said they won't. I guess that's it. They used to say no hike in 2022, and Lagarde refused to say that in the most recent press conference, which is telling, I think. The bank of England, pretty similar set up to the likes of the U.S. and Canada. The difference being bank of England raised rates twice now. They've raised rates by twenty-five basis points on two occasions. I would struggle to say there's a big economic difference that would motivate that. I think it's more of a philosophical one, which is, the bank of England never went quite to zero like in the U.S. Their tolerance for going low was a little bit less, and just their balance of risks, they're less willing to tolerate a period of high inflation. It's more about the central bank response function— that’s the technical term— as opposed to the state of the economy itself. But at the end of the day, I suspect these central banks will end up at a fairly similar policy rate level. And we're talking about rates that are in the realm of 1% or low ones, perhaps at the end of 2022, regardless of which of those central banks ex-Europe that we're talking about. Yes, it's a year of tightening. And I take some solace, though, which is that the UK has done this twice now and the world hasn't ended. Now, the UK isn't the U.S., and the U.S. has a special place in markets imaginations and centrality in terms of its economic importance. But rate hikes can be okay. I will admit, as we think about rate hikes for this year; in general, they're fine, and they're associated with further growth and we can even plug in the numbers and say, if a central bank were to raise rates four times and do a little quantitative tightening, maybe that subtracts 0.6% off the year's growth. It’s a real hit, but it's not guaranteed recession territory. It's far from it, in fact. But equally, it would be fair to say that the particular set up to this one isn't perfect in the sense that markets tend to be particularly tolerant of rate hiking when the rate hikes is because the economy is too strong. In this case, it's more because inflation is too high. It's not the preferred of the two scenarios, but it's certainly a reasonable situation to be raising rates. We can say as well that I don't think there's a policy error being made in rate hike. That's an important consideration. Is it just a mistake to raise rates? I don't think so. That's good. However, maybe we revealed a mini policy error in retrospect. In other words, maybe they should have been a little more serious about inflation over the second half of last year. And so, they're fixing it. They're not breaking it; they're fixing that problem. But nevertheless, there was a little problem that emerged that didn't get dealt with at the time. And then I guess as well, it does feel as though central banks have pivoted with some urgency, haven't they? And so suddenly they're talking multiple rate hikes and the market is speculating consecutive meetings or more than twenty-five at a go. And I'm not convinced we'll get those two things. But nevertheless, there is a little bit of an urgency to central banks making the pivot, and so it's better when central banks are moving slowly as opposed to fast. There are a couple of challenging things in there, but I would still struggle to say anything less than a decelerating recovery comes out of that.

I'm out right now. I'm talking to a lot of investors and investment advisers. The question they have is inflation. We haven't talked about inflation, I think for a couple of visits. Where are we with inflation, in your view, right now? Have we seen the peak? Has anything that's happened make you think that the inflation is going to persist at these levels longer than you expected before or the exact opposite? Perhaps with what we're seeing and what's likely to happen, are we going to be surprised how quickly things return back to normal again, assuming that the worst of the pandemic is behind us?

Yes, you always have to make some assumptions to that effect. Inflation is extremely high, as we all know; it's 5% to 7%, loosely speaking, across much of the developed world. That's not a familiar level. We do continue to expect some moderate decline over the coming year. I wouldn't say there's a sudden stop, or inflation just snaps back completely to normal, but we expect I wouldn't say a steady, but a deceleration in inflation over this year. A couple of things motivate that. I would say one is we're very lucky to be able to track some real time measures. There are some services out there that trawl the Internet for prices. And, of course, every grocery store has prices, and gas stations post prices on the Internet. It's quite amazing what you can get.. car prices. These are very sophisticated bits of analysis that occur. I can say that we're not seeing those measures rise. I should say the year measure has stabilized for those, if not come down a little bit. We're seeing some evidence of peaking going on, which is promising; not active deceleration, but not further acceleration. That's quite a promising thing, just in terms of the trend. I can say that we think, so far incorrectly— I shouldn't say we, I don't think I can speak for the resource team precisely—, but I'm assuming oil prices go down somewhat over the span of 2022, and it seems logical that's what the future market predicts and the credible forecasters think oil supply should be exceeding oil demand in the not-too-distant future. You see lots of reports of shale oil starting to crank up again, having been very sleepy for a while. So, it makes sense to me if oil prices come down; that should be a deflationary force. Even if you're skeptical of that, as long as it doesn't keep rising, that ceases to be an inflationary force, of course. And then we do expect supply chain problems to start getting better. Businesses are complaining less. In fact, I was talking with one of our European portfolio managers recently, and he was indicating that the companies he tracks are reporting a significant improvement on that front. I can't say I see a lot of numbers, but nevertheless, I am hearing that as well myself, in terms of what businesses are saying. It would make sense. We are now past Christmas, past Chinese New Year, working our way through Omicron, which has had some supply chain issues. And normally, Q1 is a month of great healing for supply chains. That's when people buy the fewest things, on average. I think we're going to see some improvements in the next few months. I think that's going to remove some inflation force. The reason I don't predict a snap back to 2% or below normal inflation would just be, I think wage pressures probably stick around for a bit. So that's one of the forces that prevents inflation from completely normalizing. Again, U.S. wage growth is almost 6%, which, by the way, means everyone got a 1% pay cut over the last year. Let's not overstay how fast that wage growth is. But nevertheless, nominally it is fairly fast. I'm assuming it sticks around, at least for another year. The inflation should become less high, we think, and we were doing work recently as well, just to bore everyone, 1970s versus today; similarities, differences of course. There are some similarities. Lots of fiscal spending now, lots of fiscal spending, Vietnam War type spending in some cases then, and maybe a little bit of politicization of central banks both times. This go around, it seems like the focus is a little less on inflation, and we don't have a PhD in economics running the Fed and these sorts of things; it may be a little bit less of a firm footing than before, though not to a problematic extent. But the difference is, we're even bigger. I mean, we're not coming off a gold standard that had previously dominated, so people didn't know what to think about inflation coming out of that. This time around, we have pretty anchored inflation expectations. The demographic set up is completely different. You had baby boomers entering the workforce and massive, ultimately inflationary implications as the population grew so quickly and people spent money and we’re in the opposite scenario this go around. I think a number of other important differences such that the balance of risks is still that we're not transitioning into some structurally high inflation environment. Maybe that's where I'll leave the inflation comments.

Yes, I was listening to Jerome Powell in his press conference after the release this past month and talking about the concern of inflation expectations changing, which is one of the key drivers of future inflation. When that expectation in consumers and businesses embeds and they're expecting those higher prices down the road, do you think we're still in a good spot in terms of have they corralled inflation expectations enough or is that a worry price?

Yes, it's definitely a focal point. I would say when we look at inflation expectations over the next year, they're high, to no one's surprise. It makes sense. Inflation probably is going to be a little high over the next year. It makes me a little nervous that inflation expectations over the next five years are higher than we're used to. We have seen some movement there, and it is toward the higher end of normal. Let's acknowledge that. I do take some solace that if you look beyond that, six years to 10, which sounds awfully far away, but nevertheless, that would maybe be the standard definition of truly long-term inflation expectations past any kind of intelligent comment you could make about the business cycle. Who knows what's happening six years from now? Those expectations have gone up, but they're still very pedestrian. They look normal. They're lower than they were for much of the last decade. I would say I don't think the genie is completely out of the bottle here, but it slipped a little bit over the short and medium term. This is one of the reasons. It's the reason, really, central banks are raising rates. They're going to do their best to bash that expectation back down. Again, the bottom line is, I don't think we're in for a structurally higher inflation environment. I don't see why we would be.

And so out of all these things we discussed, what is the one number you'd key in on that would suggest that this inflation is going to persist longer than you initially expected?

Oh, goodness. I guess one would be oil has gone further than I initially thought. That's been part of it. Another one would be, when you talk to businesses— I don't know if pricing power is quite the right term— but they basically said any cost increase they face, they're passing it along to consumers. And that's not always the case. They're not always in a strong enough position to do that. As I think about wage growth maybe remaining robust for the next year. Well, guess what wage growth becomes? That becomes higher prices if the company isn't going to eat any of that. There is, unfortunately, a feedback mechanism that could keep inflation going a little longer just on that basis. Now that could change, to the extent that consumers become less enthusiastic to spend, in a scenario. Well, guess what? Businesses suddenly are all scrambling for market share and no longer get to set the price they want. So that could end quickly. It's hard to say but as it stands right now, that's one of the enablers of inflation sticking around a bit longer.

Yes, well, I know I'm going to be paying more for that old Amazon Prime. We know that off the Amazon announcement a couple of days ago. So yes, prices are heading higher every time we go to the pump. So, Eric, thanks for spending so much time with us today. You're an economist and you're okay.

And you're not and you’re ok.

We'll check in with you next month. Thanks, Eric.

Thanks a lot. Bye.

Disclosure

Recorded: Feb 7, 2022

This report has been provided by RBC Global Asset Management Inc. (RBC GAM Inc.) for informational purposes as of the date noted only and may not be reproduced, distributed or published without the written consent of RBC GAM Inc. Additional information about RBC GAM Inc. may be found at www.rbcgam.com.

This report does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change which may materially impact analysis that is included in this report. Past performance is no guarantee of future results. It is not possible to invest directly in an unmanaged index.

All opinions constitute our judgment as of the dates indicated, are subject to change without notice and are provided in good faith without legal responsibility. Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.

Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers in Canada.

This document may contain forward-looking statements about a fund or general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated subsidiaries of RBC.

® / TM Trademark(s) of Royal Bank of Canada. Used under licence.

© RBC Global Asset Management Inc. 2022